7.4 Accounting assumptions 7.4.

1 The accounting unit concept The accounting unit concept requires the identification of economic activities that are associated with the entity as a separate entity and can be expressed as the entitys assets, liabilities, revenues, expenses, gains and losses, net income and net loss. This separation also includes the separation of the entitys liability from that of its owners.(4). (4) There is no objection in Sharia to setting up a company whose liability is limited to its capital for that is known to the company clientele and such awareness on their part precludes deception. Para 12, Resolution No. 65/1/7, Seventh Session of the Council of The Islamic Fiqh Academy, Jeddah, 7-12 Dhul Qida 1412H corresponding to 9-14 May 1992. On the other hand, some activities with which the entity is associated are the activities of other accounting units and should be reflected as such. For example, the entity may manage an investment portfolio for the benefit of other parties, manage a Zakah and charity fund or manage a Qard fund. Similarly, the entity itself as an accounting unit may be part of a bigger accounting unit. In this case, in addition to the entity producing its own financial statements as an accounting entity, the preparation of financial statement reflecting the activities of the bigger accounting unit may be appropriate. The Conceptual Framework is built on the principle that financial accounting and periodic financial reports, are from the perspective of the entity preparing rather than from the perspective of owners or other parties participating or dealing with the entity. Under this principle, the entity is separate and independent from owners or other parties participating or dealing with the entity. Nontheless, the financial statements should consider the common information needs of the primary users who are the present and potential capital providers, equity holders and investment account holders. Other providers of funds to the entity, those transacting with the entity, those charged with governance, Sharia supervisory boards, employees, regulators, tax and Zakah bodies are secondary users of financial statements. 7.4.2 The going concern concept In the absence of persuasive evidence to the contrary, financial accounting assumes the continuation of an entity as a going concern. This means that in preparing the entitys financial statements it is assumed that there is no intention or necessity to liquidate the entity. In addition, the going concern concept has an important bearing on financial accounting and the financial statements of the accounting unit. In so far as the entity is conceived of as a continuous stream of activities, it is the task of financial accounting to make the most significant measurements possible of the continuous flow of the entity activities. Under this concept, the most significant measurements possible of the continuous flow of the entity activities are those pertaining to allocating its efforts and accomplishments as between the present and future and matching those efforts and accomplishments.

Breaking up these continuous streams of activities into periodic streams between the present and the future severs many real connections and tends to give an impression of high degree of certainty with respect to the figures presented in the financial statements. In reality, what the financial statements present as of a given point in time is dependent to a very great extent on the future direction of events and circumstances that affect the entitys activities. The financial statements of a period, even under the most favourable circumstances, are tentative in character. The complete picture of the entity is never entirely discernible prior to final liquidation. The going concern concept has an important implication to an entity. Assumptions are made about the continuity of the entitys activities in the future, including its investment activities. However, the relationship between the entity and owners of investment accounts may not continue until the liquidation of investments, when actual results become known. It may, therefore, be appropriate to measure investments during the life of such investments at their cash equivalent values in order to achieve equity in determining the rights of holders of investment accounts who wish to withdraw their funds before the actual liquidation of investments. 15 7.4.3 Periodicity concept 7.4.3.1 Accrual basis There is an obligation on IFIs to present periodic reports reflecting their financial position as of a given date and the results of their operations during a specific period in order to disclose the rights and obligations of the entity and those of interested parties. This is particularly relevant in the process relating to the payment of Zakah. Hence, the accrual concept allows an entity to prepare financial statements that provide interested parties with information or directions by which they can evaluate the performance of the entity during a relevant period. This assumption also indicates the need to relate the activities of the accounting unit through the entirety of its life to the appropriate reporting periods as necessary. The accrual concept of accounting when adopted requires that financial accounting effects of transactions and other events are recognised and recorded in the accounting records as and when they occur and they are reported in the financial statements of the periods to which they relate. 7.4.3.2 Cash basis of accounting Under certain circumstances, the adoption of the cash basis of accounting becomes relevant, for instance, upon the liquidation or impending liquidation of the entity. Cash basis of accounting represents the adoption of policy to record and recognise transactions, events, circumstances or condition whereby the financial accounting effects are recognised and recorded in the accounting records as cash or its equivalent is received or paid and they are reported in the financial reports of the periods to which the receipts or payments relate. 7.4.4 The stability of the purchasing power of the monetary unit

Financial accounting uses monetary units of a given currency as a common denominator to express the basic elements of financial statements. The use of monetary units as a means of expressing the basic elements of financial statements is a prerequisite for measuring the financial position, results of operations and other changes in the financial position of an accounting entity during a specific period. The use of monetary units as a means of expressing the basic elements of financial statements may raise a question regarding the stability of the measurement unit in view of a change in its purchasing power. For example, the purchasing power of a monetary unit decreases during a period experiencing an increase in the general price level (inflation) and increases during a period experiencing a decrease in the general price level (deflation). For purposes of financial accounting, the stability of the purchasing pow